Upside Potential Research Articles

Foreign Market Investment as a Locus of Response to Adverse Performance

AbstractPerformance gap recognition derives from social comparison with rivals. We propose that the attribution of these gaps to foreign direct investment (FDI) inadequacy – and thus the likelihood of responding with FDI – is also guided by such social comparisons. Specifically, the performance gap becomes a stronger trigger for foreign market investment when underperforming peers are less engaged in FDI than outperforming counterparts, as this highlights the role of FDI scarcity in explaining the gap. Similarly, a firm's lower FDI involvement increases the performance gap's capacity to trigger FDI by making FDI inadequacy a more plausible explanation, whereas extensive existing FDIs shift the blame away from FDI insufficiency. By examining the locus of investment activity under the performance gap, we show that the associated FDI‐triggering capacity is limited to institutionally proximate environments where the upside potential for addressing the performance gap can be recognized upfront through current models, methods, and resources. Institutionally distant investments, whose potential evolves through experimentation with the local context, become increasingly unlikely as a firm falls behind its rivals. These findings suggest that a firm's response to the performance gap is shaped by inferences about the causes of underperformance and the clarity of an alternative's capacity to address the gap.

An Empirical Analysis of the Performance of Luxury Watch Portfolios among High-Net-Worth Individuals in India During the COVID-19 Pandemic

This study empirically evaluates luxury watches owned by high-net-worth individuals (HNIs) in India as unconventional alternative assets providing diversifying benefits. During the COVID-19 pandemic, the major stock exchanges in India, NSE and BSE, faced negative returns and high volatility, igniting numerous conservative investors to divest from traditional investments and retain alternative assets, such as luxury watches, due to their low correlation to financial markets. Owing to supply chain disruptions and demand forces, the overall secondary watch market prices surged throughout this period, creating high economic value for investors. Through hypothesis testing and attribution analysis, this paper evaluates the performance of watch portfolios owned by 57 HNIs, comprising of 464 watches, to investigate whether luxury watches are viable investments during economic downturns within the domain of alternative investments. Hence, this study employs suitable attribution tools such as Sharpe ratio, M2 Alpha, Treynor Measure and Jensen’s Alpha to understand the strength of their performance. Using academic literature, market data and primary data, this study found that luxury watches provided substantial portfolio diversification benefits and outperformed traditional assets like the NIFTY50 and gold in terms both nominal and risk adjusted returns during the pandemic. Brands such as Patek Philippe, Rolex, and Audemars Piguet achieved the highest performance, as Patek Philippe demonstrated superior risk-return trade-offs. Despite challenges such as valuation complexities and liquidity constraints, luxury watches provided remarkable upside potential, benefiting from a high retention rate due to their unique emotional features. Ultimately, the findings suggest that luxury watches can be viable alternative investments considering that 65% of these HNIs viewed their watch purchases as investment opportunities.

Deep Reinforcement Learning Approach to Portfolio Optimization in the Australian Stock Market

The future of portfolio management is evolving from relying on human expertise to incorporating artificial intelligence techniques. Traditional techniques such as fundamental and technical analysis will eventually be replaced by more sophisticated deep reinforcement learning (DRL) algorithms. However, it is still a long way from designing a profitable strategy in the complex and dynamic stock market. While previous studies have focused on the American stock market, this paper applies two DRL algorithms, the proximal policy optimization (PPO) and the advantage actor–critic (A2C), to trade the constituent stocks of the Australian Securities Exchange 50 (ASX50) Index. This paper also incorporates a weighted moving average into the action space and introduces a transaction threshold to help agents minimize trivial trades that lead to high transaction costs. The results are presented and benchmarked against the ASX50 Index. The A2C agent was better at following trends and had the higher upside potential but can suffer from more severe damage during bearish markets. On the other hand, the PPO agent had the lowest annual volatility and the highest maximum drawdown, which is more helpful in a bearish or volatile market.

The effect of gambling culture on initial public offering underpricing

We examine the effect of gambling culture where an IPO firm is located on its IPO underpricing. Our findings suggest that an IPO firm in a strong gambling culture region, on average, operates more aggressively than one in a weak gambling culture region. Then, we show that such IPOs exhibit lower underpricing than their counterparts. The findings remain qualitatively the same after an array of robustness checks. We interpret the results as indicating that IPO investors consider aggressively operated IPO firms to have good upside potential and are willing to pay higher subscription prices for these IPOs.

The Effect of Sustainable Alternative Cigarette to the Valuation of PT. Hanjaya Mandala Sampoerna, Tbk. (HMSP.JK)

This research investigates the impact of sustainable alternative cigarettes on the valuation of PT Hanjaya Mandala Sampoerna Tbk (HMSP.JK), a leading tobacco company in Indonesia and a subsidiary of Philip Morris International (PMI), which is actively pursuing a smoke-free future. With growing global awareness of the health risks associated with traditional cigarettes, there has been a shift towards alternative tobacco products perceived as less harmful. This study evaluates how the introduction and adoption of these alternative products influence the company's market valuation. Using a comprehensive valuation model that integrates financial analysis, industry trends, and potential growth of the alternative cigarette market, the research applies discounted cash flow (DCF) analysis to the projected 10Y HMSP’s FCFF. The evaluation was conducted under three scenarios based on the rate of acceptance of Heated Tobacco Sales (HTU) in the market both domestic and international. In the scenario analysis, the projected stock price varies significantly depending on the rate of HTU sales. Under the most optimistic scenario (Scenario 3/10% HTU revenue mix), the stock price shows substantial upside potential up to 92% with intrinsic value of Rp. 1,297. The market price of HMSP’s share is at Rp. 675 as of August 1, 2024, which indicated that current share price is undervalued. Therefore, it is recommended for investor to buy HMSP stock at current price. Based on these insights, the Author recommends that Sampoerna’s management focus on accelerating the adoption of alternative products, navigating regulatory challenges proactively, and enhancing consumer education to solidify its market position in this evolving landscape.

A Financial Analysis and Valuation of BYD

In the contemporary era, the depletion of traditional energy sources has become an increasingly pressing concern. In response, the development of new energy technologies has emerged as a pivotal strategy to alleviate energy shortages while aligning with ambitious carbon neutrality objectives. Understanding and properly assessing the financial landscape and risks faced by new energy enterprises are paramount for effective management and sustainable growth. This paper delves into this imperative by focusing on BYD, a prominent player in the new energy sector. Employing a comprehensive approach, this study begins with a SWOT qualitative analysis, dissecting BYD's strengths, weaknesses, opportunities, and threats. This analysis illuminates the nuanced landscape within which BYD operates, shedding light on both its potential and the challenges it must navigate. Subsequently, the study employs the Price/Earnings (P/E) model to assess BYD's valuation, providing quantitative insights into its financial standing and market positioning. Key findings from this research reveal a promising trajectory for BYD. Over the past two years, the company has demonstrated rapid growth in operating income, coupled with an enhanced debt repayment capacity, indicative of its robust developmental potential. However, the evaluation using the P/E model suggests that BYD's true value may be underestimated, hinting at further upside potential and market opportunities. This holistic examination underscores the importance of integrating qualitative and quantitative methodologies to comprehensively evaluate new energy enterprises, offering valuable insights for strategic decision-making and sustainable growth in the evolving energy landscape.

Venture capital exit after venture IPO

AbstractResearch SummaryVenture capital firms (VCs) sometimes continue to hold significant equity stakes in entrepreneurial ventures after venture IPO. The information economics view suggests that retaining equity signals VC commitment and venture quality. This study conceptualizes retaining equity as holding an exchange option, the option to exchange VCs' own valuation of IPO ventures for the market's valuation. Holding this option allows VCs to benefit from the ventures' upside potential. Since exit amounts to giving up the option, the option value represents an opportunity cost of exit. VCs may delay exit if this option is sufficiently valuable. The study examines two key conditions that interact to increase the value of this option: uncertainty and positive private information. This study contributes to research on VC exit and real options.Managerial SummaryWhen do VCs retain equity rather than exit after venture IPO? Researchers have addressed the impact of signaling, cash constraints, human capital constraints, blockholding, VC fund performance, portfolio diversification and institutional features. We identify a previously unrecognized driver: to retain the opportunity to benefit from an IPO venture's upside potential that is yet to be fully recognized or realized. We submit that VCs' incentive to retain equity increases with uncertainty in the venture's industry, and VCs' positive private information as indicated by venture patent applications and positive market surprises in the venture's industry. We find largely supportive evidence for the positive joint effect of uncertainty and private information on the decision to retain equity within the first year or even two years after IPO lockup expiration.

Asset Allocation Strategies: A Case Study in Mutual Fund and Inaurance Portfolios in Wallet Wealth LLP

This case study explores effective asset allocation strategies, focusing on mutual funds and insurance portfolios, with an emphasis on incorporating a de-risking factor. It underscores the importance of strategic asset allocation customised to each person’s risk profiles, Investing objectives, and temporal horizons . By utilizing mutual funds and insurance products, investors can construct diversified portfolios to mitigate risk and optimize returns. The study examines how different combinations of these instruments can enhance portfolio resilience and performance. Moreover, the integration of a de-risking factor adds a dynamic element to distribution of assets. This entails modifying the asset in the portfolio. mix depending on the state of the market and risk preferences to minimize downside risk and capture upside potential. Through historical analysis and scenario simulations, the study evaluates the efficacy of various asset allocation strategies, highlighting the benefits of incorporating a de-risking approach. It demonstrates how this strategy can protect capital during market downturns while capitalizing on growth opportunities in favorable market conditions.

Comparative analysis of hydrogen production pathways for emethanol synthesis to decarbonise industry

Methane pyrolysis and water electrolysis offer alternative hydrogen pathways to methane reforming that utilise renewable power and avoid generating carbon dioxide (CO2). On a scope 1 and 2 basis, both technologies have the potential to generate carbon neutral emethanol fuel when combined with biogenic CO2. However, pyrolysis requires significantly less energy and has a lower capital expenditure (CAPEX). Being a more nascent technology, it also has upside potential for cost reductions and valorisation of the solid carbon by-product can yield lower hydrogen costs than the incumbent technology, however, limited demand from existing markets is a potential constraint. Industry decarbonisation is constrained due to a lack of available renewables and hydrogen infrastructure. Pyrolysis offers a potential cost-effective use of the available renewable assets in the early stages while the carbon by-product is not a constraint and until sufficient renewable infrastructure is in place to support water electrolysis at a cost-effective scale.

THE REAL OPTIONS VALUE OF OPEN INNOVATION THROUGH CROSS-BORDER MERGERS AND ACQUISITIONS: EVIDENCE FROM PUBLICLY LISTED FIRMS IN CHINA

This study examines the impact of open innovation through cross-border Mergers and Acquisitions (M&A) on the real options value of Chinese publicly listed firms between 2008 and 2020. The findings demonstrate that open innovation through cross-border M&A has a positive effect on the upside potential and a negative effect on the downside risk of firm performance. Additionally, absorptive capacity and corporate governance play significant moderating roles in shaping the real options value of open innovation through cross-border M&A. These findings are robust across alternative measures of real options value and open innovation investments, sample classification based on institutional distance, and endogeneity tests. The research implies that cross-border M&A, particularly in countries with a favourable innovation environment, plays a crucial role in strengthening firm performance. Additionally, the study underscores the need for firms to develop absorptive capacity and enhance corporate governance as part of their innovation strategies.

Does Unconditional Accounting Conservatism Imply Upside or Downside Risk? Evidence from the Options Market

SYNOPSIS Conservatism captures an asymmetric reporting practice in response to uncertainty in business operations (earnings). Such uncertainty in business operations implies that investors are exposed to tail risk such that there is a probability of large earnings growth, offset by the probability of a large earnings decline. Existing literature has shown that accounting conservatism relates positively to stock returns. However, the literature is silent on whether this pricing is driven by positive earnings expectation or by the potential negative earnings growth. Using option-implied assets, we find that conservatism is priced by investors’ risk aversion (downside risk) rather than the potential upside. Several robustness tests confirm the findings. We also provide evidence that the returns are not driven by mispricing but as compensation for the risk implied by conservative reporting. We further decompose an alternate conservatism measure and find that our results are driven by the uncertainty in expenses rather than revenues.

The paradoxes of generative AI-enabled customer service: A guide for managers

Generative artificial intelligence (GenAI) presents a disruptive innovation for brands and society, and the power of which is still yet to be realized. In the context of customer service, gen AI affords companies new possibilities to communicate, connect, and engage customers. This article draws on scholarly research and consultation with customer service leaders to present and discuss the possibilities for GenAI in the context of customer service, specifically GenAI chatbots. Importantly, this article presents potential paradoxes of GenAI-enabled customer service, adding to the debate about the role and impact of GenAI for brands. Specifically, we present six paradoxes of GenAI customer service: (1) connected yet isolated, (2) lower cost yet higher price, (3) higher quality yet less empathy, (4) satisfied yet frustrated, (5) personalized yet intrusive, and (6) powerful yet vulnerable. For each paradox, we suggest brand response strategies to mitigate downside and manage potential upside.

Metals Streaming and Royalty Financing: A Framework for Assessing Mining Sector Financial Benefit–Sharing Implications for Governments

This chapter offers a simplified approach to assessing the potential impact of metals streaming and royalty financing on government revenues. Subject to the availability and quality of information, a revenue impact ratio can be determined by comparing the potential revenues to the government from more traditional forms of financing with potential revenues to the government from metals streaming or royalty financing.The chapter considers the key features, advantages, and disadvantages of these alternative funding options for mining projects, and then develops an illustrative model to demonstrate their potential impact on government revenues. This forms the basis on which to identify the key challenges, and the policy considerations when addressing them.While metals streaming provides upfront capital and a potential hedge against price risk for producers, it could also limit the upside potential for both the mining company and the host government. On the other hand, royalty financing offers stable income streams and diversification opportunities for investors but may lack direct exposure to metal price increases.The ultimate risk faced by resource-rich governments as a result of an increase in the use of metals streaming and royalty financing arrangements is a suboptimal share of the potential benefits that will accrue from the mining operations. Specifically, the risk is of a reduction in taxable income and royalty revenue.At the heart of the policy considerations pertaining to resolving these challenges and risks is reducing information asymmetry between the government, the mining company and the streaming or royalty company. One important way to do this is to strengthen tax legislation and enforcement mechanisms. Implementing anti-avoidance rules, such as interest limitation rules, can limit the ability of metals streaming and royalty financing companies to exploit tax and other loopholes. Other features with which to strengthen the legislation include clear minerals pricing rules, and clearer provisions regarding withholding taxes.

A population-based epidemiological and health economic analysis of fracture-related infection.

The aim of this study was to perform the first population-based description of the epidemiological and health economic burden of fracture-related infection (FRI). This is a retrospective cohort study of operatively managed orthopaedic trauma patients from 1 January 2007 to 31 December 2016, performed in Queensland, Australia. Record linkage was used to develop a person-centric, population-based dataset incorporating routinely collected administrative, clinical, and health economic information. The FRI group consisted of patients with International Classification of Disease 10th Revision diagnosis codes for deep infection associated with an implanted device within two years following surgery, while all others were deemed not infected. Demographic and clinical variables, as well as healthcare utilization costs, were compared. There were 111,402 patients operatively managed for orthopaedic trauma, with 2,775 of these (2.5%) complicated by FRI. The development of FRI had a statistically significant association with older age, male sex, residing in rural/remote areas, Aboriginal or Torres Strait Islander background, lower socioeconomic status, road traffic accident, work-related injuries, open fractures, anatomical region (lower limb, spine, pelvis), high injury severity, requiring soft-tissue coverage, and medical comorbidities (univariate analysis). Patients with FRI had an eight-times longer median inpatient length of stay (24 days vs 3 days), and a 2.8-times higher mean estimated inpatient hospitalization cost (AU$56,565 vs AU$19,773) compared with uninfected patients. The total estimated inpatient cost of the FRI cohort to the healthcare system was AU$156.9 million over the ten-year period. The results of this study advocate for improvements in trauma care and infection management, address social determinants of health, and highlight the upside potential to improve prevention and treatment strategies.

Service system resilience under resource scarcity: from vulnerability to balanced centricity

PurposeDisruptive shocks significantly compromise service contexts, challenging multidimensional value (co)creation. Recent focus has been on consumers experiencing vulnerability in service contexts. However, the susceptibility of service firms, employees and other actors to the impacts of disruptive shocks has received little attention. Since resource scarcity from disruptive shocks heightens tensions around balancing different needs in the service system, this paper aims to propose a framework of balanced centricity and service system resilience for service sustainability.Design/methodology/approachAdopting a conceptual model process, the paper integrates resilience and balanced centricity (method theories) with customer/consumer vulnerability (domain theory) resulting in a definition of multiactor vulnerability and related theoretical propositions.FindingsDepleted, unavailable, or competed over resources among multiple actors constrain resource integration. Disruptive shocks nevertheless have upside potential. The interdependencies of actors in the service system call for deeper examination of multiple parties’ susceptibility to disruptive resource scarcity. The conceptual framework integrates multiactor vulnerability (when multiactor susceptibility to resource scarcity challenges value exchange) with processes of service system resilience, developing three research propositions. Emerging research questions and strategies for balanced centricity provide a research agenda.Research limitations/implicationsA multiactor, balanced centricity perspective extends understanding of value cocreation, service resilience and service sustainability. Strategies for anticipating, coping with and adapting to disruptions in service systems are suggested by using the balanced centricity perspective, offering the potential to maintain (or enhance) the six types of value.Originality/valueThis research defines multiactor vulnerability, extending work on experienced vulnerabilities; describes the multilevel and multiactor perspective on experienced vulnerability in service relationships; and conceptualizes how balanced centricity can decrease multiactor vulnerability and increase service system resilience when mega disruptions occur.

Stochastic Economic Ranking Addresses Risk and Uncertainty for Decision-Makers

_ This article, written by JPT Technology Editor Chris Carpenter, contains highlights of paper SPE 213385, “Stochastic Economic Ranking: A Prudent Way To Address Risk and Uncertainty for Decision-Makers,” by Mahesh Narayanan, SPE, Mehaboob Abdulazeez, SPE, and Khadija Bukhamsin, SPE, Saudi Aramco, et al. The paper has not been peer reviewed. _ Project screening and ranking is inevitable even when an organization faces no resource bottlenecks. In project economic predictions, the stochastic approach is prevalent and proves to be the most natural approach to address technical and commercial uncertainties. In contrast with a deterministic approach, a stochastic Monte Carlo simulation helps in understanding the range of possible outcomes to enable effective decision-making. The objective of the complete paper is to present an integrated stochastic work flow that addresses the subsurface, surface, and cost uncertainties to screen, rank, and grade opportunities early in the derisking process. Introduction The proposed work flow simultaneously can address all technical and commercial uncertainties with a Monte Carlo model and predict a range of possible economic outcomes with customized economic analysis tools. In other words, it can achieve complete unbiased sample randomness in expected project outcomes. The work flow also creates a stage-gate decision-tree approach and reviews economics as a series of staged investments. This helps to expose incremental capital in the life cycle of a project responsibly and help with course correction where necessary. Value Addition: Stochastic Approach A common practice in the oil and gas industry is to simply examine low, middle, and high cases. This is a limited view of possible scenarios and provides a false sense of precision regarding expected project outcomes. The term “stochastic” refers to the property of being well-described by a random probability distribution. A stochastic approach features the following advantages: - A stochastic model addresses uncertainties in inputs with complete unbiased randomness in the outcomes. - By running thousands of calculations and using many different estimates of future economic conditions, stochastic models predict a range of possible future investment results, showing the potential upside and downside of each. - Once the work flow is followed and the model is set up, multiple realizations can be created with a single click. Proposed Integrated Stochastic Methodology In the world of project economics, classical stochastic economics is a tool to address uncertainty and risk. In simple terms, a mean or deterministic view of a production profile, along with one view of a schedule, is taken and blended with probabilistic distribution of cost inputs. This data is then taken through a Monte Carlo model to create multiple scenarios to predict a range of possible economic outcomes. This narrow range of economic outcomes only covers the uncertainty in cost but does not cover variability in well performance and time.

Combining low-volatility and mean-reversion anomalies: Better together?

This paper contributes to the existing stock market anomaly literature by being the first to analyze the benefits of combining two distinct anomalies; specifically, the low-volatility and mean-reversion anomalies. Our results show that on a long-only basis, these two time-varying anomalies could be combined into a double-sort investment strategy that includes some desirable characteristics from each of them, thereby making the portfolio return accumulation more stable over time. As the added-value of low-volatility investing stems mostly from the risk-reduction side, while contrarian stocks are generally highly volatile with remarkable upside potential, the use of the double-sort portfolio-formation in which the contrarian stocks are picked from the sub-set of below-median volatility stocks can shorten the below-market performance periods that have occasionally materialized for plain low-volatility or plain contrarian investors.

Do firms manage their share prices to mitigate investor short-termism?

Recent work documents a behavioral tendency of investors to expect excessively high upside potential for low-priced stocks. These expectations expose low-priced firms to greater pressure for short-term performance because their poor earnings news leads to greater investor disappointment and larger stock price declines. Therefore, we hypothesize that firms with a long-term focus, such as those that invest heavily in research and development (R&D), avoid low share prices. Consistent with our hypothesis, we find that firms with higher R&D capital decide on a higher filing price in their initial public offering, are less likely to undergo a stock split once listed, and upon a stock split, choose a higher post-split price. We establish a causal link between firms' R&D and share price management by exploiting the exogenous increases in R&D expenditures induced by the staggered introduction of state-level R&D tax credits in the US. Our study suggests that firms with large R&D capital target high share prices to shield their long-term investments from investor short-termism.

Breadth of Ownership and the Cross-Section of Corporate Bond Returns

Using breadth of corporate bond fund ownership to proxy for the combination of short-sale constraints and divergence of opinions in the corporate bond market, this paper investigates whether and to what extent Miller’s overpricing theory holds for corporate bonds. Consistent with the theory, we document a significant and positive relation between changes in breadth and the cross-section of future corporate bond returns. Because of the bounded upside of debt, the ability of changes in breadth to predict returns appears to be less pronounced for corporate bonds relative to stocks. Furthermore, this predictability is stronger among bonds with higher credit risk, indicating that the effect of short-sale constraints and divergence of opinions on bond mispricing tends to be larger for riskier bonds with more upside potential and, thus, more scope for overvaluation. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The internet appendix and data are available at https://doi.org/10.1287/mnsc.2023.4950 .

The return barrier and return timer option with pricing under Lévy processes

This work introduces two new financial derivatives into the finance literature. The first is the return barrier option, which has emerged recently as a popular contract in the OTC markets. This contract is similar to a barrier option, but the knock-out event depends on an asset’s returns, rather than its level. Its direct exposure to jump risk offers protection from a key source of market incompleteness, with great potential value to hedgers and investors. The second contract is the return timer option, which is proposed in this work for its natural relation to the return barrier option, and by analogy to Timer Options written on realized volatility. This contract offers similar upside potential to a European option, but can be purchased at a substantial discount, a trade-off for bearing jump risk. Due to the dependence of these contracts on single (daily) return events, capturing jump risk is essential to their pricing, as diffusion-based models are unable to generate sufficiently heavy tails at short time horizons. Thus we provide analytical pricing formulas for the return barrier option, along with efficient and accurate numerical methods under Exponential Lévy dynamics, to capture the heavy-tailed returns. We then prove that the return timer option can be conveniently priced as a linear combination of return barriers, providing a consistent pricing framework for the combined family of derivatives. Given the recent trend in return barrier options in OTC markets, as well as the interesting mathematics required to price them, this work offers both practical and theoretical contributions to the literature.